Initiation of CIRP against a Government Company: NCLT Faces another Conundrum

[Rongeet Poddar is a final year B.A. LLB (Hons.) student at West Bengal National University of Juridical Sciences, Kolkata]

In Harsh Pinge v. Hindustan Antibiotics Limited, the two members of the National Company Law Tribunal (NCLT) Mumbai bench have laid down contrary opinions in a case concerning the admission of an insolvency plea by an operational creditor against Hindustan Antibiotics Limited. This case highlights the impending conundrum that many tribunals are likely to encounter in the near future in admitting insolvency pleas against government companies. The operational creditor in the instant case was a senior employee of the concerned company against which there were certain pending salary and gratuity dues. The employee duly followed the statutory mechanism in section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) to initiate the petition before the NCLT. The primary contention in the case was whether an insolvency proceeding could be undertaken against a government company, the entire shareholding of which is held by the Government of India.

The NCLT Order

The judicial member relied on the landmark constitutional law case of R.D. Shetty v. International Airport Authority of India to hold that Hindustan Antibiotics Limited was an instrumentality of the state. The reasoning offered was that if the entire share capital of a corporation is held by the Government, it is sufficient evidence to indicate that a corporation is indeed its agency. It was observed that the company in the instant case had been incorporated to ensure the availability of life-saving drugs at affordable prices to the weaker sections of the society. Furthermore, the judicial member opined that the amounts claimed by the petitioner were payable in due course of time, since the Government ordinarily infuses further working capital in such enterprises in light of the public interest at stake. On this basis, the corporate veil of the company was lifted and it was held that initiation of a corporate insolvency resolution process (CIRP) against the company would tantamount to initiating a CIRP against the Government of India. According to the judicial member, the IBC did not envisage such a development as it would open a Pandora’s Box. 

Curiously, the judicial member did not pinpoint any specific provision of the IBC to come to this conclusion. Instead, reliance was placed on the Constitution to hold that, in pursuance of the goal of socialism enshrined in the Preamble, the fate of a government company cannot be endangered by bringing it under the framework of the IBC. A distinction was carved out between public-oriented government companies and other corporate entities which are created solely for making profits. The petitioner was advised to pursue alternate remedies under Article 226 or Article 32 of the Constitution of India instead. Finally, the judicial member concluded by observing that the Constitution of India prevails over the scheme of the IBC and expressed hope that a suitable mechanism would be created by the Government to cater to the demands of the creditors in a financially sick government company.

The technical member in the two-judge NCLT bench, however, took a contrary view and held that the Constitution did not impose any bar on the application of the statutory remedy available to the operational creditor under section 9 of the IBC. It was held that Hindustan Antibiotics Limited was a company incorporated under the Companies Act and thus it would come within the definition of corporate debtor in section 3(8) of the IBC. No distinction was made between a government company and other corporate entities under section 3(7) of the Code which defined a corporate person. A singular exception was only provided for a financial service provider under the definition of corporate person. A CIRP therefore could not be initiated against such an entity. Furthermore, the technical member highlighted how the CIRP had been admitted against public sector undertakings by other NCLT benches around the country. The constitutional validity of the existing scheme of the IBC had also been upheld by the Supreme Court of India in Swiss Ribbons Private Limited v. Union of India. Therefore, in the instant case, the technical member allowed the petition to be admitted as the three prong requirement in section 9 of the Code, namely the existence of debt, occurrence of default and the existence of dispute were proved beyond doubt. The member also expressed a word of caution that creditors should not be left in the lurch simply because the corporate debtor was a public sector company. Following the abolition of the Board for Reconstruction of Public Sector Enterprises in 2015, the application of the IBC was deemed to be the most appropriate instrument for reviving public sector enterprises.

Analysis

The judicial member of the NCLT Mumbai Bench seems to have erred in his purposive interpretation by reading a restriction into the IBC which had not been envisaged by the lawmakers. The object of the IBC is to preserve a distressed company as a going concern. The Constitution of India is indeed the supreme law of the land. However, section 238 of the Code which sets out the non-obstante clause in the IBC does not incorporate any distinct limitation from the Constitution to impose a complete bar on the resolution of government companies. Therefore, the goal of ‘socialism’ in the Preamble should not be artificially read into the IBC to stall the resolution of a government company and jeopardize the interests of all stakeholders in the process. The NCLT cannot afford to be a mute spectator while a government company continually defaults on payments of dues to its employees and eventually bleeds to death. Such a stance creates a slippery slope and bears potential to cause insurmountable harm to the economy in the long run.

Interestingly, the IBC does not have any provision such as section 462 of the Companies Act, 2013 which allows the Central Government to exempt the application of any provision of the Companies Act in the case of a particular class of companies in light of public interest. The Insolvency Law Committee in its Report had “unanimously agreed that introduction of such a section will be beneficial for relaxing the procedure under the Code for certain classes of companies, including for MSMEs, under the aegis of public interest while preserving the scheme and objective of the Code.” On this basis, an exemption had been carved out in section 29A of the Code to allow promoters in MSMEs to submit a resolution plan in the event that they are not wilful defaulters. However, there is no exemption in the provisions of the Code that requires lifting of the corporate veil in the case of a government company to disregard an insolvency plea. Government companies and private companies are placed in the same pedestal under the ambit of the Code. Therefore, the decision of the technical member of the tribunal appears to be the correct law and should be endorsed in the future.

Rongeet Poddar

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